U.K. Domestic Stock ETF Is the Most Popular in Nine Months
Stock Traders Shrug Off Brexit Vote Fears by Rushing Into ETF
(Bloomberg) -- Conflicting Brexit headlines keep coming and Boris Johnson’s ability to pull off a deal remains in doubt. But this isn’t stopping stock investors from taking a bet on the U.K. economy.
The Vanguard FTSE 250 UCITS exchange-traded fund, which tracks the index of mid-cap companies that are more sensitive to domestic growth and benefit when sterling is stronger, has attracted about 81 million pounds ($104 million) so far this week, the largest inflow since January, according to data compiled by Bloomberg.
Ever since speculation emerged on Tuesday that the European Union and the U.K. are nearing a deal, the ETF’s underlying FTSE 250 Index has been outpacing its FTSE 100 counterpart of larger companies, many of which are international exporters that suffer when the pound rises. This is also visible in fund flows, with the iShares Core FTSE 100 UCITS ETF attracting just 14 million pounds since Monday, down 85% from the previous week.
“The FTSE 250 is more domestic and benefits from improved domestic growth prospects,” said Lars Kreckel, global equity strategist at Legal & General Investment Management in London. “It’s reflecting the changing probabilities” of a Brexit deal.
JPMorgan Chase & Co. strategists Mislav Matejka and Prabhav Bhadani raised U.K. domestic stocks to overweight on Monday, saying they appear attractively priced and can ride increased consumer confidence and corporate spending as clarity over Brexit grows.
Consumer Confidence
If Johnson succeeds in getting the Brexit deal through Parliament on Saturday, BNP Paribas strategists including Edmund Shing say that the FTSE 250 will rise at least 5%. They estimate a drop of as much as 10% if the deal falls through.
It’s an important turning point for scorned U.K. equities that are the most vulnerable to the state of economic growth. Prior to this week, Vanguard’s FTSE 250 ETF had barely seen any inflows since June, whereas record flows were heading to BlackRock Inc.’s FTSE 100 ETF.
Investors have been avoiding U.K. equities for years and the country’s stock market is the least popular in the world, according to the latest Bank of America fund manager survey released on Tuesday. In a monthly poll that ended Oct. 10 -- before the optimistic Brexit deal reports -- respondents forecast British stocks as having the lowest chance of outperformance among major equity markets over the next decade.
U.K.-focused equity funds saw their first weekly inflows in a month in the seven days through Oct. 16, attracting $184 million, according to EPFR Global data.
Despite the ETF inflows and a brief rally, uncertainty continues to haunt U.K. stock traders. Johnson is now battling to sell his new Brexit deal to skeptical members of the U.K. Parliament before a crucial vote on Saturday. French President Emmanuel Macron added to the pressure when he told reporters in Brussels that a further extension shouldn’t be granted if Parliament rejects the deal.
To contact the reporter on this story: Ksenia Galouchko in London at kgalouchko1@bloomberg.net
To contact the editors responsible for this story: Blaise Robinson at brobinson58@bloomberg.net, John Viljoen, Jon Menon
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